Banks Can Be on the Hook for Fraudulent Transactions

What’s the extent of a bank’s liability when a customer’s account has been
hacked?

A district court in Maine held that Ocean Bank wasn’t liable for a hacked account, but the First Circuit Court of Appeals remanded the case, finding
that the bank
could potentially be liable.

The quick
facts are as follows (courtesy of Network World): A hacker
correctly answered the security questions and accessed Patco Construction
Company’s Ocean Bank account. The bank failed to notify the company that the
transactions were flagged for suspicion. In the end, the bank was able to
recover $243,406 from the transaction, leaving a loss of $345,444.

The First Circuit’s decision was based largely on Article 4A of the Uniform
Commercial Code, under which a bank receiving a payment order would generally bear the
risk of loss of any unauthorized funds transfer.

The bank could shift the risk of loss to the customer if the bank’s security
measures were commercially reasonable.

The UCC explains that a
commercially reasonable security procedure is a question of law, to be decided
by a court.

The First Circuit went on to say that the bank must show not only that the
security procedures were commercially reasonable, but also that the bank accepted the payment order in “good
faith and in compliance with the security procedures.”

While the First Circuit found the bank’s security system to be commercially
unreasonable, the court didn’t issue a ruling on the extent of Ocean Bank’s
liability. Instead, the First Circuit Court
of Appeals left the UCC Article 4A question to the district court, on remand.

The district court will now be charged with deciding what obligations or
responsibilities should be imposed on a commercial customer, in light of a
commercially unreasonable security system.

The outcome of the case is TBD, but it’s certainly an interesting case.

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About U.S. First Circuit

U.S. First Circuit features news and information from the U.S. Court of Appeals for the First Circuit, which hears appeals from U.S. District Courts in Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island. This blog also features news that would be of interest to legal professionals practicing in the 1st Circuit. Have a comment or tip? Write to us.